The Role of Financial Development in Climate Change Mitigation: Fresh Policy Insights from South Africa

The present research on the relationship between financial development and CO2 emissions has shown conflicting, inconsistent results. This study resolves this problem by examining the direct and indirect effects of financial development on CO2 emissions using the Environmental Kuznets Curve (EKC) analytical framework. Our scientific work for South Africa between 1960 and 2020 is built on the cutting-edge dynamic autoregressive distributed lag simulations technique. The findings, which were based on five different financial development metrics, show that financial development both temporarily and permanently lowers CO2 emissions. We further support the EKC theory’s applicability in the case of South Africa. More significantly, the results of the indirect channels show that financial development reduces the deleterious effects of economic growth, trade openness, and foreign direct investment on CO2 emissions while strengthening the role that energy utilization plays in promoting carbon emissions. Additionally, the pollution haven hypothesis (PHH), which is explored by employing trade openness and foreign direct investment variables, is predicated on the existence of an inefficient financial framework. When financial development reaches certain levels, PHH for both of these factors vanishes. Finally, technological innovation reduces CO2 emissions even when industrial value addition fuels them. In light of our empirical findings, this research offers some critical policy suggestions and novel viewpoints for South Africa as it implements national interventions to cut CO2 emissions and achieve its net-zero emission goals.